QBI Deduction 199A: Permanent, 23% Rate Beginning 2026

(UNITED STATES) The tax break that millions of non‑corporate business owners rely on to lower their taxes is no longer set to disappear. As of September 7, 2025, the Qualified Business Income (QBI) deduction under Internal Revenue Code Section 199A has been permanently extended and strengthened by the One, Big, Beautiful Bill Act (OBBBA) of 2025, which was signed into law on July 4, 2025. The move locks in a benefit that pass‑through businesses—sole proprietors, partnerships, and S corporations—have used since 2018, while raising the deduction rate from 20% to 23% beginning with the 2026 tax year.

For immigrant founders, independent contractors, and family‑owned partnerships across the United States 🇺🇸, the changes add long‑term certainty to a tax rule that directly affects how much income they keep to reinvest in their businesses and lives.

How the revised Section 199A works

Under the revised Section 199A framework, the deduction retains its two‑part structure but with updated mechanics:

• Taxpayers other than corporations may deduct 23% of qualified business income (QBI) plus 23% of qualified REIT dividends and qualified publicly traded partnership (PTP) income.
• Each component is calculated separately, then combined. If one component produces a loss, that loss does not reduce the other component; instead, the loss carries forward to offset future income from the same category.
• The increase from 20% to 23% applies to taxable years starting after December 31, 2025. For tax year 2025, the original 20% framework still applies.
• The permanent extension removes the uncertainty that the deduction would sunset after 2025.

Practical takeaway: Track QBI and REIT/PTP categories separately, including any carryforwards, to avoid lost benefits or double counting.

New minimum deduction and tips exclusion

The OBBBA adds protections for smaller operations and clarifies treatment of tips:

• Minimum deduction: A floor of $400 applies for active QBI when QBI is at least $1,000. This floor is indexed for inflation.
  • Benefit: Even modest businesses—like a new hair salon, a delivery contractor, or a first‑year consulting practice—see a tangible tax benefit if they have positive QBI.
• Qualified tips exclusion: Beginning with taxable years after December 31, 2024, amounts tied to the new qualified tips deduction (a Section 224 concept introduced by OBBBA) are excluded from QBI calculations.
  • Employers in tipping industries (restaurants, hospitality, personal services) must track these amounts carefully because they can no longer count them toward QBI.

Phase‑in ranges, wage/property limits, and SSTB rules

The OBBBA adjusts the thresholds that determine when complex limits begin to phase in:

• Phase‑in ranges expand:
  • Single filers: from $50,000 to $75,000
  • Joint filers: from $100,000 to $150,000
  • These wider ranges are indexed for inflation after 2025.
• Context: The 2024 base thresholds were $191,950 (single) and $383,900 (joint), with the phase‑in ranges extending $50,000 above those amounts. Base thresholds will adjust for inflation for 2025 and beyond.
• The wage and qualified property (WQP) limitation still applies above the phase‑in thresholds. This cap is based on W‑2 wages and the business’s unadjusted basis in qualified property.
• Specified service trade or business (SSTB) rules remain (e.g., health, law, accounting, consulting, athletics, financial services), but now phase in over a wider income band.

Implication: For those near or above phase‑in bands, payroll, equipment purchases, and entity structure decisions can materially affect the QBI deduction.

IRS guidance and next steps

• The IRS has issued guidance and transition relief for 2025, including treatment of the new tips deduction.
• Official resources remain the primary authority. For technical rules, definitions, and examples, see the IRS page: IRS Qualified Business Income (Section 199A) information.
• Expect additional updates—worksheets, instructions, and examples—as the 23% rate approaches for 2026 returns.

Example of separate component calculations

Consider a joint filer with:
– $120,000 QBI from an S corporation, and
– $20,000 qualified REIT dividends.

Under the 23% rate (2026+):
1. Deduct 23% of $120,000 for the QBI component.
2. Deduct 23% of $20,000 for the REIT/PTP component.
3. Add the results; they are computed independently before the overall taxable income limitation applies.

If the business had a negative QBI year, that negative amount would carry forward to offset future QBI for that business, but it wouldn’t reduce the REIT/PTP component in the current year.

Policy trade‑offs and fiscal impact

• The Congressional Joint Committee on Taxation estimates the OBBBA’s extension and QBI modifications will cost about $780 billion over ten years.
• Supporters argue the extension encourages investment and hiring by allowing non‑corporate businesses to retain more earnings.
• Critics say the benefit tilts toward higher earners and creates uneven results across industries due to remaining SSTB limitations.
• Agreement: Making the deduction permanent ends years of temporary certainty and reduces year‑to‑year planning distortions.

Impact on small businesses and immigrant entrepreneurs

• Many immigrant‑owned pass‑through businesses (sole proprietorships, partnerships) rely heavily on predictable tax treatment.
  • Examples: small trucking companies, housekeeping services, home health agencies, food service operators, IT consultancies started by newcomers who are federal tax residents.
• Predictability helps with:
  • Cash‑flow planning
  • Quarterly estimated tax payments
  • Hiring and equipment purchase decisions
• The widened phase‑in ranges soften the cliff effect, giving seasonal or lumpy‑income businesses more room before strict limits bite.
• Bookkeeping and payroll systems must now handle:
  • Separation of QBI from tips excluded under Section 224
  • Accurate W‑2 wage records
  • Qualified property basis tracking for WQP tests
  • REIT/PTP statement tracking for partner‑level reporting

Compliance and planning recommendations

Key action items for owners and preparers:
– Keep clean books and separate ledgers for each business activity.
– Maintain W‑2 wage records, track property basis for the WQP test, and retain REIT/PTP statements.
– Track carryforwards for QBI and REIT/PTP losses on a year‑by‑year schedule.
– Monitor taxable income relative to thresholds, and plan timing for income recognition, equipment purchases, retirement contributions, or charitable giving when relevant.
– Update year‑end reporting for partnerships and S corporations:
– Partner‑level worksheets should capture each partner’s share of QBI, W‑2 wages, qualified property, and REIT/PTP income.
– Consider professional advice if near phase‑in thresholds or with mixed income streams (SSTB vs. non‑SSTB).

Warning: Mislabeling income as QBI when it falls under the new tips exclusion, or failing to disclose SSTB status, can lead to costly corrections.

Broader context and outlook

• The QBI deduction originated in the Tax Cuts and Jobs Act of 2017 as a temporary measure (20%).
• The OBBBA’s 2025 redesign keeps the core structure, makes it permanent, increases the rate to 23% for 2026+, widens phase‑in ranges, and adds the minimum deduction floor.
• The permanent change helps entrepreneurs plan multi‑year budgets without fearing a sunset that could otherwise raise tax bills.
• The IRS is expected to refine forms, instructions, and examples to fit OBBBA’s framework and may issue further guidance, especially on mixed SSTB/non‑SSTB issues.
• Employees cannot claim the QBI deduction on wages, and corporations remain excluded from the rule—guardrails that preserve the deduction’s focus on non‑corporate business income.

Final practical summary

• The QBI deduction is now permanent and more generous (23% beginning 2026).
• Key changes to note:
  • Permanent extension of Section 199A
  • Rate increase from 20% to 23% (2026+)
  • Minimum deduction of $400 (QBI ≥ $1,000), indexed for inflation
  • Qualified tips excluded from QBI (taxable years after 2024)
  • Wider phase‑in ranges (single: $75,000; joint: $150,000), indexed thereafter
• For owners: keep meticulous records, separate income categories, monitor thresholds, and prepare for the tips exclusion and minimum deduction mechanics.
• For advisors and software providers: update worksheets, forms, and guidance to reflect the 23% rate and new rules before the 2026 tax year.

For authoritative technical details and ongoing updates, refer to the IRS guidance: IRS Qualified Business Income (Section 199A) information.